Q2 2021 BRP Inc Earnings Call
All participants please standby your meeting is not ready to begin.
Good morning, ladies and gentlemen, welcome to be RPC Q2 fiscal year 2021 earnings call I would now like starting meeting over to Mr. exceeded <unk>. Please go ahead Mr. <unk>.
Thank you Judy.
Good morning, and welcome Yorkies Conference calls for a second quarter fiscal year 21.
Joining me this morning, <unk>, President and Chief Executive Officer, and so that's MSM Chief Financial Officer.
Before we move to the prepared remarks, I would like to remind everyone that certain forward looking statement will be made during the call are subject to a number of risk and uncertainty.
I invite you to read the RPM DNA for this thing up.
Also during the call reference will be made to supporting slides and you can find the presentation on our website CRP dotcom under the Investor Relations section.
That's very covert.
Thank you for the good morning, everyone and thank you for joining us.
Before I talk about our resolve this quarter allow me to see that in this unusual year.
I'm extremely proud of de affordable for people in our dealers in reacting with the GTT.
In order to respond to the crisis and preserve our business momentum.
Our result, this quarter are significantly better than our original projection.
That we made when depend de me was first declare.
Confinement measure workforce in place.
We were we were in an excellent position heading into this situation.
And we will emerge stronger from this crisis.
Based on our revised projections and better visibility.
We are expecting revenue down 5% to 9% 40 year.
Normalized EPS range of three daughters, 65 to three Dollarsninety 540 year.
The range is quite large because of the uncertainties we are still facing.
Let's start with the highlight of the quarter beginning with the financial results on slide four.
Although most of our site were shut down in April and May.
Revenue came in much better than expected, that's 1.2 billion dollar only down 15% from last year second quarter.
Our normalized EBITDA ended the quarter up 28% to 214 million, resulting in a normalized earnings per share of the daughter 14 up 61% over last year.
This performance was driven by stronger than expected demand for products and parts accessories and apparel.
That drove retail worldwide.
This has led us to deplete our yard inventory and reduces our promotional activity more Dan we had anticipated.
Operational expenses were reduced have flat.
The highlight of the quarter was the strength of the demand for products.
As you know we have steadily been increasing market share for the last several quarters.
We started Q1 with a stronger retail momentum in our inventory was positioned to sustain the threat.
However, given the exceptionally high demand for products and the production shutdowns, we ended up depleting our inventory quickly in the quarter and therefore less some market share.
Our analysis shows that I've traveled option were limited people begin to rethink how they will spend their free time.
Many have turned to parse sport.
So we need to spend quality time with friends and family, while respecting social distancing guideline.
This trend led to exceptional rebuilt the from is in all our key markets and all across our product lines.
Our retail sales were up 40% in North America, 41%, <unk>, 34% in Asia Pacific and 27% in Latin America.
As you can see on the slide all product line had significant growth.
Let's talk about the impact of the force closure of our plan on inventory.
As you can see on this slide our North American theater entered into the was down 51% at the end of July and our finished good inventory in our warehouse and then trends it around the world was down 13%.
Do illustrate how fast the depletion hot.
Take a look at the graph to the right.
I'd buy side inventor read decline in May and June as retail the ramp up and we felt the impact of the suspension of our production line from the previous months.
For personal watercress, the effect is even more drastic.
And then three was very low in June and July pending the season with almost no see due at the liberal due to the popularity of our brand.
Given the strong retail trends, we expect it could take several quarters before we get back to up tumble inventory level.
Our team have done an incredible job of quickly ramping up production in this new ones that on them.
Our focus is on managing the true how our operation, while ensuring that we preserved the health and safety of our employee and our business partner.
The strong retail demand in all our product line was in part driven by a significantly higher in number of new entrance to the industry.
Early in August we conducted a global study with customers in seven countries last purchase unit during the quarter and the results are phenomenal.
As you can see on this slide when looking at our retail sales, 77% of our par sport customer purchase from B R. P for the first time.
Representing an increase of 51% over the same quarter last year.
By product line. It represents 74% for RV, 65% for three will be cool and 32% for personal little watercress.
Of these new customer, 41%, we're completely new to par sport industry.
This represent almost three times the number of new entrant, we had over the same period last year.
These results are very impressive and present, a very good opportunities to grow our business.
Our focus is to ensure that the surge of new entrants is converted into lifelong customers.
Now, let's turn to slide eight for the year round product highlights.
Revenue were down 16% you to the temporary shutdown of our production site.
Sure the upset by somebody boat product mix for tree wheeled vehicle driven by the introduction of the new Spider RT and by lower sales program.
On the retail site, the North American side by side industry and the season 20 on June Thirtyth.
With retail hop low 20%.
And I'm side by side had another very strong season, which retail up low 40% solidifying our number two market share position in the industry.
We also performed well in international markets with retail for the quarter up almost 50% media me and up about 30% in Asia Pacific.
No not even five years I've toured the opening of U.S. face to face CDP.
We have tripled the size over the size of our side by side business and our momentum remain very strong to ensure we can maintain that momentum we haven't announced the construction of the second plan dedicated to side by side and you on ice.
This new plan will grow our capacity by about 50% and is expected to be operational by fall of 2021.
Turning to we TV.
The North American if Youve industry also ended it season 20 on June Thirtyth.
With retail how high teen percent days for the same period, our retail was up low 20% and ended the season with the number three market share position in North America.
Alright, TV business also performed well in international markets, which retail up over 30% in Asia Pacific and over 50% in E Me.
Now looking at three wheeled vehicles.
After a slow start to the season due to the closure of writing school and license Bhutto's and consequently, the major readjustment of our marketing plans when the situation turn around our tree will be called the retail picked up significantly.
Starting in June and has continued through the summer.
Looking at the industry nine months into season 20, the north immediate country will have equal industry retail is now how high single digit why the can them retail is up low teen person.
With June and July performing significantly better than expected.
And retail up over 90% over as writing school reopened.
We are planning a virtual lunch new canam products on October 1st.
Overall, we are very happy with our cannot business.
Turning to seasonal product on slide nine.
Seasonal product revenue were down 25% impacted by temporary production suspension.
And he gets if product mix for principal watercraft.
Which were partially offset by lower sales program.
Now looking at retail.
The personal watercraft industry also benefited from the strong consumer demand for I'll direct TV that are compatible with social distance. Thanks.
10 months into season 20, nor committee can industry retail is up mid teen percent age.
See the personal watercraft retail was slow in April may and then took off in June.
As a result retail is also up mid teen percent age over the same period, notably gaining share in the industry largest sigman with the new cdti platform in the recreational segment.
Given production constrain the very strong retail demand. He do currently has its lowest level of network inventory in its history.
The same positive trends was also seen and then international market.
With retail up for the quarter into high 30% in Latin America, and mid 40% in EMEA and Asia Pacific.
On September 10, we are hosting a virtual product lunch for all our dealer worldwide with some exciting personal watercraft product news.
We believe that the demand for next season will continue to be strong.
With respect to snowmobile, we are still very early in the season, but retail is already hubs 70%.
We believe it is you do the same trend that have benefited our other product line.
We are now in full production and we'll be able to me dealer orders and hadn't more unit if the condition warranted.
Continuing with the looked at par sport parts accessories, and apparel and OEM engines.
Revenue were up 20%.
Given by a higher volume of P. and eight coming from strong unit retail sales and higher replacement parts revenue driven by an increase use age of product by consumers.
<unk> are up over 20% accessories are up over 30% and apparel is up over 40% compared to last year. The same trends affecting vehicles sales applied to these category.
Finally.
Looking at our marine business.
Compare year over year, Revusiran revenue were down 35% due to the wind down they've been lose outboard engine and inventory is depleting faster than plan.
As retail is also performing well.
These results were partially offset by the impact of the additional revenues from the acquisition of tell water last year.
The retail level I do mechanism is up high teens percent age. Many two is up high 30%.
And tell the water is up I 20 percentage.
The current phenomenon of getting outdoor is also helping our boat brands.
We are progressing well with our discontinuation plans for outboard engine and remain committed to our marine by build transformed strategy, which we are pleased to see is on track.
We remain convinced that our best strategy is to focus our marine business on the growth of our boat brands.
Accelerated investment on new technology, and innovative products, including the ghosts engine family.
That I will turn the call to Sebaski.
Thanks, usually and good morning, everyone I suppose they mention or second quarter results came in much stronger than we were anticipating just three months ago, driven by the exceptionally strong worldwide demand for products throughout the quarter.
Our revenues than quarter $1.2 billion, a decline of only 16% from last year. Despite the significant impact from the production shut down.
Our normalized EBITDA was up 28% to $214 million driven by improved adjusted gross profit margins and lower operating expense as a result, but cost saving measures. We have implemented to preserve liquidity given the uncertain environment. We were operating in just a few months ago.
This resulted in normalized EPS of $1.14 cents up 61% from last years.
These better than anticipated results, coupled with the significant efforts deployed by our teams to preserve liquidity.
Led to the generation of $248 million, a free cash flow so far this year.
And with over $900 million of additional financing we secured this quarter, we stand in a very solid financial position with about $1.1 billion plus cash on the balance sheet.
Well, we remain cautious about the current environment are solid financial flexibility is providing us with ability to be opportunistic and accelerated investments in the business to drive long term growth for the company as highlighted by the recently announced construction of a new side by side plant.
Coming back to our revenue performance, our ability to generate roles in certain markets, what's driven by the inventory availability in our yard.
International restart other quarter with a good inventory position given that the region was more impacted by cooler than during the first quarters with revenues down 29%.
The region rebounded with strong retail demand, we were able to ship you want us from inventory and generate revenue growth of 15% for the quarter. Despite the production shutdowns.
The story was quite different North America, we started the quarter with clean inventory position in the yard and we continued running all quarter. Despite resuming production as retail demand continued to be very strong I will come back later with the outlook on how we expect to fulfill demand for products going forward.
Our inventory of parts accessories, and apparel was at a better position, allowing us to seize the market strength and deliver revenue growth of 20% driven by strong retail momentum and increased consumer usage of their products.
Now looking in more detail the gross profit margin on slide 15.
We gained 230 basis points of gross profit margin coming from volume mix pricing in sales programs in the quarter.
Foreign exchange rate variations were also positive for 40 basis points, leading to a gross profit margin before the impact of ever need upward engines wind down and <unk> of 25.2 person.
Do you have enrolled wind down had a negative impact of 330 basis points and cold it probably due to the temporary production shut down and under absorption of fixed cost or the negative impact of 180 basis points.
Turning to slide 16, or courting normalized an income was up $32 million from last year, driven by a 75 million dollar favorable impact coming from lower operating expenses, resulting from a cost saving initiatives, we have implemented and a favorable 8 million dollar impact from foreign exchange. These elements were part.
Yes that by the negative impacts of $41 million coming from volume mix pricing themselves programs $3 million coming from production costs, and depreciation and $7 million coming from higher financing costs, turning to slide 17 for looked at network inventory position.
I will say much of our North American network inventory is down 51% from last year's second quarter.
We experienced exceptionally strong demand for products since late April while our unit output was limited by temporary production suspension in April and May.
The products that were the most impacted by this situation, where it says the TV and Pwc given the timing of the production shut down in the retail growth.
Inventory for these products is historically low into ensure that we meet demand we have added production shift and increase line speed.
Looking further the second dedicated facility to us as the we recently announced should provide us with greater flexibility for that product line. When it comes online in the fall of 2021.
That's for Pwc, you also plan on extending our production schedule, which will increase shipments and each one of fiscal year 22.
Three wheel, we were able to produce additional units in June and given not only celebrated later in the summer inventory is adequate and we are maintaining or initial production plans for next season.
Finally for snowmobile given the current trend for power sport products, we are anticipating that demand may come in higher than our initial plan and we have extended our production schedule, providing us with the flexibility of increasing output to meet demand if required.
We're pleased by the strengthened demand for our products, we gained market share when inventory for our product available and we're convinced that we built back inventory and sustain or fast pace of product introductions that we will continue outpacing our industry.
And now the guidance on slide 18.
With both network and our yard inventory being at historically low levels and the solid trend the power sport products continued to experience we have good visibility on the demand for products for the rest of the year and are comfortable issuing guidance looking at revenues, we expect your own products to be flat to down 4% for the year impacting revenues for the second.
For the year to be flat to up 7% driven by growth in SSV any TV, partly offset by a decrease in three we'll do a change in timing and timing of production leading to shipments being more concentrated into each one of next year.
And our wholesale and international driven by product availability.
For seasonal products revenues for the year are expected to be down 12% to 15%.
When looking at the second half Pwc is expected to be down the increase production for the upcoming season, well, mostly benefit next year, and we expect snowmobile to be down driven by lower shipments in international markets power sports parts accessories and apparel revenues.
Our expected to be flat to up 5% for the year.
And marine revenues are expected to be down 25% to 30% with a decline, resulting from the outboard engine business White <unk> wind down.
This is resulting in total company revenues are expected to be down 5% to 9%.
The normalized EBITDA is planned to be flat to up 5% and the normalized Cps and between 365 to 395 down five the up 3% versus last year.
Our guidance range is wider than usual for this time of the year as we still face uncertainties related to the quoted well we have put in place strong measures to protect our employees, we're not immune to the potential risk, but the <unk> virus could represent all the economy, our dealers and our suppliers, which could lead to reduce demand more production or.
Increased cost, hence the wider range.
Terms of capital allocation, our priorities remain on investing for future growth and preserving liquidity for what May lie ahead for fiscal 21, we're expecting capex to be between 275 and $300 million with over $200 million to be spent in the back half of the year, notably as we're wrapping up the newest.
Just to be facility and continue invest in product development.
Other capital allocation priorities given the current context, we believe that preserving the strength of our balance sheet should be our priority and we plan on revisiting capital deployment alternatives, such as reinstating buybacks for the dividend after the third quarter.
Finally, turning to slide 19 for an overview of our expectations for each.
Revenues for the second half of the are expected to be flat to down 7% as a stronger demand for products suspected to be offset by production timing, notably as we shift a higher proportion of pwc and three real production into fiscal 22 for the future retail season.
Lower wholesale and international markets as yard and in transit inventory is very little going into Q3, and we expect it will take a few quarters to get back to more normalized levels and more outboard engine revenue, resulting from the wind down of a week.
For the normalized EBITDA is expected to be down five to up 4% with Q4 coming in slightly stronger than Q3.
The key drivers in the back half the year are expected to be a contribution from the stronger demand for products and the wind down of Evan Rudolph Board engines, which will somewhat offset by other elements highlighted previously in an increase in operating expenses as we resume certain investments in the business given the positive momentum we urge.
Periods.
All in all in light of the current environment, we expect a solid second half the year and expect the momentum to continue well into next year when factoring the shift of personal watercraft and real production to next year, the need to replenish dealer inventory around the world and the new SSV plant will come online in the fall off.
Next year with this I'll turn the call back to levels that.
Thank you said about team.
We have been fortunate in the current context that despite the real hardship for many people the demand for our product is high.
We anticipate that for a certain period of time, we'll need to continue to manage risks.
Such as answering health and safety in our facilities and potential disruption to our supply chain.
I would like to again express my gratitude and narration to our dealers for their resilience in far employees will have gone the extra mile in reflecting all the additional health and safety measure we ask what's in place.
This has been and we'll continue to be critical to our business continuing to.
We are pleased with the performance of all our product line and the progress we have made on our different initiative.
Based on the overall momentum we are experiencing the new trends that have emerged and all right and the consumer base. We are expecting the second half of the year to be similar to last year ended bode well for the year ahead.
We are committed to ensuring that these new entrant and first orders are converted into lifelong customers. Once they have experience our vehicle and boats.
Although we expect that will be a lot of OLED TV in the next few months into mid to long term. We believed that we are better positioned than ever for success and on that note I will turn to called over to the operator for questions.
Thank you.
Please press star one at this time, if you have a question yeah, we'll be a brief boss while the participants register for questions. We thank you for your patience.
The first question comes from Steve Arthur from RBC Capital markets. Your line is open. Please go ahead.
Great. Thank you and and good morning, I'm just wondering if you can elaborate a little bit more on the current status of the operations at your plants.
Just some sense of what level of utilization you're running it now and how much of it impacted local health measures are having in particular in Mexico and I guess finally, just how the utilization should trend through the balance of the year.
Good morning, Steve All operation right now are running at full capacity.
And we are able to operate without and the efficiency less everywhere in the world.
Then we're quite happy.
And then very very impressed with the are people who accept.
To put a lot of safety measure and the health care measure and operate efficiently in this whole context.
No that's remarkable so in terms of adding.
A new shifts and new lines and such as that.
On top of what you're doing now or is that 100%, reflecting those additions no.
I mean, we were running right now at full capacity everywhere than the obviously if.
I mean, we expect to have some here and there a difficulty with supplier, it's hard to deliver tight delivery or stuff like that but.
This is thing that we can than age.
Let's see like severity, explaining the guidance a weekend.
We can overcome some small difficulty obviously, if there would be a whole.
He can find men in the country around the world that's would be more difficult.
But the very very happy with the we have people are operating our operations.
And just a final one just very interesting your service customers and and new customers in particular, 40% new power sports.
I guess on that hasn't been an active marketing efforts. So far trying to attract these people or is that just a natural flow of people looking for new things. This summer.
And they get all that.
Looking ahead I'm sorry, good yeah definitely went.
When all of this started and we saw the surge of new the man.
We've done a detailed survey in March and we've done another one or beginning of August and basically.
To better understand who is buying and tried to talk to them directly and encourage them to try our product.
And obviously for competitive reason I cannot give you all the detail of our plan but.
Obviously, we are in contact more and more with new customers, knowing who they are.
Trying to promote the experience the could have with our product and just an example in July with lunch and initiative called the Unchartered Society.
If you go on our website that be RP Unchartered Society Dot com.
You will see we partner with a lot of operator in North America.
We believe we partner with the best into the industry offering safe and the safe right and high quality, but right now I mean, you can book snowmobile a ride.
In the in the Rocky Mountain in Utah.
You could the we have a rifle woman underwrote right in Sungevity Edmonton in California, with the Riker one of my favorite visit that and keep those adventure in the Grand Canyon I'd cylinder then we trying obviously to do cross sell between consumer if someone purchase.
I'd buy side, we're trying to promote dose tour that that leaves you can try or watercraft for a slow mobileye and the winter.
But I can tell you are our marketing people are extremely.
Active to try to talk to those customer and try to make them lifetime.
Customers.
Thank you and congrats again.
Thank you.
Thank you.
The next question comes from Mark Petri from.
Your line is open. Please go ahead.
Hi, good morning, and congrats on the excellent excellent results I just wanted to ask a bit more I'm just a follow up on the on the outlook for snowmobiles wondering if you could just you read through a lot of a lot of statistics, there and just wondering if you could sort of summarize.
The the production capacity right now I know inventories are lower at the dealer level, but do you expect that to be sort of normalized in the coming months and just sort of an overview of the of the of the outlook for snowmobiles for this season.
Good morning, Mark, but first of the snowmobile season, and the very quickly mid March last year, you should remember most of the 12 system work flows mid March.
Because of the government.
Regulation, then we ended the season.
All the OEM ended the season with more inventor read then.
Previous year.
And the with took orders from our dealers in April the middle of the the crisis and a we restarted in our case in Vancouver, and in Finland, where you started production a bit later.
Than originally planned because we needed to produce some three will vehicle in the May and June.
Right now we are schedule.
Both of our factory in Finland, and then.
Cool.
To run a full capacity to Christmas time, we ask capacity to meet or the order that we took from the dealers.
And like I said Seb said on his.
These intro.
We have some capacity to had done or if there will be a dumb and from a dealer will follow the trends closely.
In October and November and we plan some material to be able to react quickly if there was indeed.
Okay. Thanks for that and just from a from a competitive standpoint in terms of marketing and promotion I understand sort of early on you guys were fairly aggressive in terms of marketing and Samir promotions and financing deals when did those get ratcheted back and then how are you or what's your expectation.
The industry is going to approach the snowmobile.
And we'll go through them.
Yes for over a good morning, Mark overall, Oh, we we ended the first quarter a bit more up the cautious and are planning for retail and so we have provided for some programs.
But these programs were not need, especially that the recent was very strong and when you looked at next season, there's less noncurrent inventory.
And so where the way we look at the second half of the are we we believe that promotions will be a tailwind to our results there'll be a lesser of a need for Ah for retail incentives.
Lets call occurrence as well so it should be a positive 11th and that's factored into our guidance number.
Okay I appreciate the comments all the best.
Thank you.
Thank you. The next question is from Ben Wyatt Wacky from Deutsche Bank Capital markets. Your line is open. Please go ahead.
Yes, thank you very much and congratulations for a the very impressive quarter. So jewels equal you mentioned some color on how the Doug the appendix impact your five year plan.
Was wondering whether its postpone some product introduction or.
Put in advance and product introduction translating.
Into a bigger market, especially with the new entrants coming to the power sports industry.
Oh, good money, but the what.
For sure.
Everything shut down in March.
And it was shut down for two months, we had to tweak a bit.
Our our R&D at Fort than our product planning, but the sense of what we believe we'll make a big difference in the industry have not changed then overall.
All the program going from mother Deere 20 to 21 this year our ongoing as plan. There is a few tweaking hair here and there but.
I'm shift, maybe a month or two but nothing nothing.
Nothing that we believe will affect.
Our five year plan.
To be honest I'm very impressed.
You know the working from home.
How we were able to be efficient in this whole context.
Because obviously there is things that are easier to do by phone, but there is when you talk about product development, you need to touch and feel try it's a bit more complicated than the team have done an angry incredible job to pull it off.
No change on the five year plan.
Okay, and with respect to capital deployment. Unfortunately, you gonna be originating VNC idea and dividend with the third quarter results, but given the new plant built in Mexico could you talk a little bit about the.
Working capital movement expected them to sick enough and maybe some color about capex expected for fiscal 22.
Good morning, Ben.
First half of the year, we generated solid free cash flow.
Coming from obviously the good result, working capital was a positive as well with the inventory reduction and they are that we collect the back half of the error I'm expecting inventory to rebuild they are rebuild the will will offset some of that from the accounts payable so probably cash gen free cash flow Gen probably.
Lets say 100 million for the back half of the year.
Capex as you see back out for the year is going to be very loaded with about 200 million dollar of investment.
Obviously, when the crisis started we adjusted some of our plans for this year and so capex is lower than what we were expecting when we were looking at our budgets, let's see back in January when there was very little talk of course.
Obviously some of that is going be portion next years I'm expecting next year to be.
Pretty an important year in terms of investments obviously, we have.
We're investing in and.
And more investments so a it will be a record year in terms of capex investments for us for 22.
Okay and last question for me when we look at slides 15 with respect to a the gross margin you quantified the impact of even route outboard engine wind down and also to cut Didnt 19, I would just be curious what we should expect can be there's any more.
Costs with respect to had been rude winding down and Cub Didnt 19 impact for the second.
But very very low costs related to the wind down we took all of that in the in the first core in the for some in the first and most of it in the second in terms of what kind of the cash costs.
When I look back.
Back half of the year or the full year or you see my normalized EBITDA margin. There is showed improved by 103 to 140 basis point just based on the guidance, what's going to be driving that improvement about 50 basis points from operating expense and the rest will be a coming from margin.
Okay perfect for the full year right, one I guess or do you guys wanted to.
Okay. Thank you very much more defined jump on that thanks.
Thank you.
Your next question is from Robin Farley from Yes. Your line is open. Please go ahead.
Great. Thank you.
Just trying to think about.
Inventory declining all retail rising and this chart you had I wonder if you can give us.
Color.
Hi.
Rate change in that retail through June July and kind of what.
Most of August.
If you can help us think about.
Is there.
Just sort of mathematically.
Retail for you could go in Q3.
Based on.
He is fairly depleted.
Trace their server natural cap that even though you're.
Capacity everywhere.
Based on what you're able to ship.
Inventory is that we shouldn't expect.
But you know maybe strong demand is there just kind of natural cabin.
Thank you.
Yeah. Good morning, Robyn, obviously, yes, the retail decline.
Well the recent was very strong in the beginning of a quarter and that retail growth slowed down as far as we saw our inventory go down.
August is still very good I'll remind you that Q3 of last year was a very very strong quarter in terms of retail, especially in the month of August.
Fight thought despite the low inventory, we're still up on retail.
Four or be business, obviously as you mentioned the inventory for Pwc is super Super leads and so retail and the in August is down.
When I looked at Q3, and the expectation for resale limits, but I'm not a there's a certain ceiling, yes, so what the retail could be a with low inventory in personal watercraft snowmobile shipments that are bit later than last year.
We expect good retail, but not to the level, where it was last year in terms of retail growth because of the whole inventory situation and as we go into Q4 as the inventory guess replenish.
We should see retail pick up but for us and as I mentioned in my prepared remarks, a lot of the units that we will be producing specialty for personal watercraft and three will will be shipped next year and that's when we'll come back to more normalized inventory levels.
So it'll take a few quarters before we we stabilize the inventory in the network.
Okay and just thank you for that and just make sure I understood.
Yes.
Shipping later and personal watercraft inventory Super Lean and you said two retail would be lower there.
You are saying retail.
Just for the seasonal but not for year.
Got for year round Yep.
Oh.
Okay, and I guess.
Points.
Where you're starting to see retail.
And I guess I'm thinking specifically the off road or.
Sure.
Where you're actually able to see retail levels start to accelerate a little bit as you ship more or not not at that point.
Well, it's still early I mean, we've inventory of the retail is still up.
So we're still very lean inventory levels in the network.
As I said will take a few quarters before we come back to more normalized levels and when I say few quarters. That's next year fiscal year 22, when we when we have the new plant running.
And so our expectation when I look up the inventory outlook in the network for Q3 in Q4 and still expecting it down to be down significantly year over year at the end of Q3 in Q4.
But maybe to give some colors last year.
Right like since you mentioned last here in August just to give you. Some numbers are faced with watercraft to do the comparison, because we don't have a new watercraft this year, but last year in August our retails between all product line, except watercraft was up about 40%.
And the right now so far in August we are up excluding watercress again.
A bit higher than 20% and that's despite with uptick in inventory in some product line.
And we believe the men will be dare, we believe.
Every OEM is struggling with the with the filing the inventory, but the demand is there no doubt about that.
Okay.
Helpful. Thank you.
Thank you.
The next question is from Craig Kennison from.
Hey, I argued your line is open. Please go ahead.
Yes, hi, Thank you for taking my questions and congratulations on a quarter as well one of the follow up on Robin's question. Just so I understand the retail comment regarding Q3 said I think that you said I'm not to the level of Q3 of last year did you mean, the level of growth last year or the absolute less.
Below.
The level of growth last year.
Thank you and then wanted to dig into your survey, which is really interesting on first time riders and.
Do you have any data on.
The follow through a first time riders I'm imagining that people who buy a.
Maybe you know RV years some.
Power sports equipment tend to buy one for the family, but me by more as time moves on so one question you just what's the follow through typically have a first time buyer either buying a new unit to replace that unit or adding units to the garage because it's such a great activity.
But like we said on our.
On the slide that we had into package 23%.
Our customer purchase in Q3 in Q2, our existing customers.
This is lower because we had a surge of new entrants.
The quarter, but there is no doubt Craig that.
We are all surprised by did a surge of new entrants and we're doing everything we can to gave them.
The how to ride our product to do cross product selling.
And the to encourage them to write in different unfit. On then then this is our marketing efforts and we believe that opportunity will be therefore.
Well no.
I think we always knew that who were competing against leisure and when I see leisure on that we're not the special is but if we take cruise.
Airline and amusement park.
This is huge industry NDR significantly down.
Then I think there was an important teed there that will remain for probably a few years and you'd the analysts say that it will take two years to dose.
And just to go back to normal then right now our Fourq is to make sure that we make those customer lifetime customers.
Thank you and then again regarding your survey I'm wondering to what extent you tapped into the behavior of your core riders.
Specifically I'm wondering whether some of your existing writers who might have been in the market to replace their unit. This year, maybe instead, just said I'm going to ride this year no need to compete with everyone else to buy units that are scarce in the channel because I'm really wondering whether that customer deferred demand in the into next year perhaps.
Apps, which would create a more sustainable trend going forward.
Yeah, I don't have Craig top of mind that level of detail I'm sure. Our team has it but for me I don't have it.
The tip of our mind.
Maybe one an interesting data we can give you and again, it's not for Q2 is from March.
15 to the end of July.
The number of people who purchase.
Who are between 18 and 44 years old.
The number of people increased by 49% versus last year.
Woman.
Again from March 15, two the end of July plus 62%.
Family people to purchase a product to use it with family.
Plus 53% then it's coming you end trend and we attracting more D var diverse customer base, which we believe is very healthy for everyone in the industry.
Great. Thank you.
Thank you.
The next question is from Brian Morrison from TD Securities. Your line is open. Please go ahead.
Hi, Good morning, I was a couple of follow ups specifics prior question. So.
For said in terms of the dealer catch up with dealer inventory being down 51% can you maybe just give us the dollar value of that side to get back up to the optimal level.
Power sports overall, and maybe specifically for Pwc.
Well it if you look at the the outstanding inventory that that's there and as the floors that we haven't or balance sheet, I mean were down almost $1 billion in terms of inventory.
Network and so in terms of dollar figure that that's that's what it represents what is quite sizable in terms of reduction.
Okay, and then in terms of your Capex, it's going to be at all time levels for next year, I presume thats greater than $400 million, Yes, that's fair.
Okay and in terms of your leverage your commentary about reviewing the dividends are in shabby.
What would your target leverage be assuming you have visibility going forward.
What we've operated pretty much in the range of and debt to EBITDA of two times, that's an area, we're comfortable and going into the crisis that provided us with flexibility of getting additional financing and so obviously will continue having discussions with the board on what's the optimal leverage level, but.
Lesson learned was that at these levels than with the type of debt structure that we had in place with a covenant light and long term maturity was something that served us well during.
The last few months and I think it's something that we will try to preserve going forward.
Okay and then last question just in terms of obviously power sports very well, but also marine boat sales were.
The strong as well just maybe an update on the boat inventory as well where you stand on that front.
Yeah. The both has been to read decline a bit.
But not test rustic as what we had into parts support business.
Declined by about 25%.
Thank you very much congratulations.
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Yes.
Thank you. The next question is from Greg.
Ladies Kenya.
From Wolfe Research. Your line is open. Please go ahead.
Hey, guys. Good morning, it's actually a trend whiteman on for Greg If we look at the three key retail color that you guys gave that was really helpful. But how should we think about market share against that backdrop should we expect more share loss into next quarter.
It all depends on the on the inventory position of our competitors. So that's something we do not have visibility on.
As I said, we believe we started with a leaner inventory position going into this crisis, because our retail was super strong.
January February and March.
Where we outperformed the industry and even outperform what our expectations were our units Shaw flew off the shelf or if I can say early in April and May.
We were shut down for a few weeks longer than most of our competitors and so with all the question of inventory replenishment.
When we looked at our situation going in we were a market leader we had the innovative products, we have agreed you'd or value proposition and so there might be some share loss driven by inventory availability in the short term, but we believe that.
And things to come back to more normal and were able to meet demand with our capacity.
That will continue that momentum going forward.
We'd like to put the bid of colors on this.
At international level, where we had enough inventory because we got chip prior the shutdown a we've gained market share we've lost some market share in North America, because the timing of the production shut down into shipment.
It was for North America, but we don't talk massive numbers I was talking a point or two here and there.
And it's something that we believe we will catch up when the right level of inventory.
We'll be there because the fundamental of our strategy didn't change.
And it's about product, it's about the value proposition for the dealer and that has not changed.
Okay. That's that's fair.
Maybe just simplistically given the inventory de stocking in the retail momentum why arent you guys expecting more topline growth in the back half the year isn't the way to think about it that that's really just sales in shipments shifting into next year, given some of the disruption or.
What what is sort of the way to the frame that.
Well, that's one of the big elements, where we're shifting more units.
Upcoming season into fiscal year 22, when the other one is international where we need to replenish inventory. We finished the second quarter varying both in yard in transit inventory, obviously, the ship something in Australia Theres a few weeks on the water that you need to factor.
And so there's that element as well just rebuilding that inventory in our yards just to be able to supplied to the man.
Great. Thank guys.
Thank you.
Thank you. The next question is from Mustain lobby from stifled JMP. Your line is open. Please go ahead.
Hi, good morning.
My first question is on the on the supply chain, obviously, what I would call vid everybody in the supply chain has been stretched and I'm wondering if you could give us some color as to how to situation has evolved this summer and how confident you aren't that you know.
Supply chain is solid to help you out a for instance capture the at the.
Strong somewhat snowmobile season coming up.
Yeah. Good morning, nothing for sure I mean, it's a rocky it's I reckon role here for the people in the in operation I mean in Canada, you had the railway blockage in the spring we had the Puerto Montreal last month.
We had California supplier were shutting down a long period of time then.
But at the end of the de we've been able to overcome all those.
It was difficulty.
Sometime we could have the backorder parts for a deal or two we prefer to assemble back order and.
For the past the parts on the vehicle a few days leader, but overall.
We are able to manage the situation and like we said.
There was a few hiccup like this and the back half we believe it's manageable.
Obviously, if a country would shut down for a month.
That could be more difficult, but we can the planned for this plan in we're planning for some hiccups, but the.
Not a big shut down and so far.
We have done a great job to manage.
Okay. Thank you and I may have missed this but.
You are guiding for marine revenues to be down 25% to 3% and this year, if we exclude Evan rude what would that look like.
Well listen rules for here is about 100.
40 million dollar a reduction last year was a 200 million dollar impact on our revenues. So if you. This year will be obvious we sold some units in the first quarter.
And so net is about 140 million.
So so so the the shortfall in revenues this year is $140 million yeah. So all of it.
Well Board engine, Okay and last question on your on your customer survey, you know, you're saying, 40% or new to the industry. What is usually the proportion of new customers and the industry you know in normal conditions.
Okay, I'm not sure, 100%, but I think it's one third of that.
It's certainly going to 40% Yep.
Okay.
Okay perfect. Thank you think you'll see.
Thank you.
The next question is from Cameron Doerksen from National Bank Financial Your line is open. Please go ahead.
Thanks, Good morning, I, just wanted to dig maybe a little bit further into the the margins.
In the quarter, nor normally Q2 would be a I guess, a lower margin corner for you. Obviously there were a lot of puts and takes a this quarter, but I don't know if you can provide any more.
Color around.
We had to next year in a Q2 I mean is at 25% gross margin I guess adjusted something that's that's an achievable number and it kind of a normal year or whatever that may be but you know any kind of I guess color you can sort of put around what what is from a more normalized margin might be here going forward.
Yes, good morning, let be what else was probably give you obviously there's noise as you said between Q1 in Q2 was won't give you the full picture for the six months of the year.
So last year, we were at a 22.5.
In six months this year, we're at 23 before any well, we wind down or cold weather impact.
So about a evolve only 50 basis point improvement.
Volume was negative so I.
Okay, that's going to go away next year.
The plus that we got was on the sales program. So for a full six months is about 120 basis point positive it back.
It all depends on how next year is going to go or are we going to see that benefit. They have about 100 basis points next year on our gross margin because of a.
We still had good demand for products in a less competitive environment a were less non current inventory.
So still early to call. What next year is going to be like in terms of gross margin, but with better capacity utilization and potentially a better sales programs, we might see a 100 basis point improvement in margin on a full year basis.
Okay and is there any of the I guess, a sort of the cost savings you've achieved outside of the selling and marketing. Our some of these more more permanent says you've learned to do things more efficiently maybe there's more remote work out things like that I'm. Just wondering if you can talk about sort of more permanent cost reductions will be important one is the.
Our decision to exit the outboard engine business as we said the in Q1, it's about a 60 to 70.
Said TPS impact this year, we should probably get about a 40 cents benefit of it and that's going to obviously rolled over the next year and we'll get the full year benefit.
A comes from.
Obviously, the saving comes from operating expenses that are going away.
And yes, there are some lessons learned but obviously we are focused on growing this business and so.
There's no no big cost saving from working from home I mean, theres a structure that someplace that needs to be supported a we'll have some employees.
Working more remote next year, but a lot of them will still be in our premises hopefully.
And obviously, we continue focusing on being efficient how we run the business and that's part of it or what we do every year or so well continue driving a margin improvement.
Okay, Great and just finally from me a shifting gears.
If you can talk a little bit about the used market for off road vehicles, and and a personal auto got maybe snowmobiles as well I mean, our understanding is that theres, a very low availability of abused.
Product out there in the market. So I'm wondering if you have any data on on died twice what the sales of use products have been no might be difficult to detract, but to any data on that and what do you think that means for new products sales as we look ahead to next year.
Yeah. As you said, we don't have any data of the inventory out there by region, but one thing is sure I mean, we heard a lot of dealer, saying they are empty.
Watercraft was totally empty this summary, North America.
And I believe is the same thing far froze snowmobile to season is just starting.
But I was talking to a theaters Saturday and the there is a surge of customer at the leadership right now and obviously the salespeople are seeing by now because we'll be out of inventory. So then.
I think it's all of this is very healthy for the industry.
And the forward to dealers and the will all gain from it.
Okay No that's great. That's all for me thanks very much.
Sure.
Thank you.
Next question is from directly from Canaccord Genuity. Your line is open. Please go ahead.
Yeah, Hi, Thanks, and just one for me in terms of.
Given the strong demand pull forward here that we've seen are you guys seeing any change in early stages here in terms of dealer order patterns like our dealers looking now that potentially hold more no product on the on their floors, just given that there really strong demand that they're seeing.
Good morning direct first.
We believe that in general dealer.
Don't like inventory and the somewhere from planning we had too much inventory do you had too much inventory before the Corvidae. Then we believed that this this old surge demand could give us an opportunity when I see us the dealer and thus to maybe we're a bit the inventory in the network it will take hold.
While before we get there.
But this is an opportunity that all of us to get or the other OEM the dealer and us whether on leaner on inventory and be more efficient, but it will take a while before we get there.
Okay. That's helpful. Thank you very much.
Thank you.
Next question is from Jamie Katz from Morningstar. Your line is open. Please go ahead.
Hi, good morning.
Yeah.
That's a little bit more color in the Canadian market looks like that's out there.
Hello.
Yeah Yeah.
Wondering maybe.
Reaccelerated in.
The other geography.
[laughter].
Hey, good morning, Jamie.
It was down in the quarter, obviously coming from one the leaner inventory and the shipments of personal watercraft that we had to reduce but the other big factor is a is probably in snowmobile shipments we ship less snowmobiles and the second quarter then.
Last year.
These are units will be shipping in the third and fourth quarter.
Okay, and then for the Unchartered Society.
Program, you mentioned earlier you Guy.
It depends on your has to be providers and then I.
[laughter] shipments.
Hi, good morning.
About.
Initiated.
Our next year.
Iran.
First definitely I mean, we partner with people that we believe our divesting the industry and obviously the use our product, but we don't think it's meaningful in the overall thing or do you have the fleet the vehicle that did turn.
Probably once a year.
But is not meaningful in the whole thing.
Thank you.
Thank you.
Question is from Gerrick Johnson from BMO capital markets. Your line is open. Please go ahead.
Great. Thank you.
Three questions.
So first question your decision well the announcement on the new factor is made in early July so when when was that decision made because that's something we're contemplating pre covert back January February or is that something that a you know.
Demand you've seen since the pandemic did that trigger that decision.
Good morning, direct I mean, as we've said I mean, you what part of the on this call last September.
We were starting to plan for it.
Obviously, when the cobot thing happened in mid March we put everything on the whole, but when we saw the surgeons and then we have a restart the program than it was plan that's something that with the growth that we had equal vid, that's something that.
We did anyhow, but Ah that's why in the middle of all this we decided to announce and move forward.
Okay, Great and then a follow up on Fred's question.
For the second half sales to be flat to up seven I can you talk about other variables that would go into that guidance, specifically I'm thinking about the retail demand you're expecting and also where you are planning on dealer inventories to end up at the end of a.
In January and ended the year.
Yeah, as we said, we're very focused on on producing many units as weekend in the second quarter, there's going to be a an international inventory replenishment, which I mentioned about one item. We didn't talk about is as parts and accessory performed.
The second quarter.
Obviously, driven by the strong demand in our products.
It was soft in the first quarter was actually down in the first quarter impacted by coal business. So.
Are there opportunities there for the second half of the year, our guidance calls for let's say down to two up 7%.
Some of it than the second quarter was probably a tailwind.
He dealers being close in the first quarter and more a more cautious more cautious planning from them. So.
So, we'll see where that ends.
But we certainly like to see the performance that we had in Q2 continue when the and the team is very focused on the on making sure we deliver strong growth on the pack site.
Okay, well Jos I mentioned earlier that you're going to run leaner run leader on inventory says I mean, the optimal level of dealer inventory is lower than it had been.
In the past.
Well in absolute again depends on the overall industry and the number of days or could we reduced the overall number of days by let's say, 25%, yes, but doesn't mean that the inventories going to go down by 25% probably not because obviously the industries are growing our market share is growing so that's something we need to factor in when we look at the overall total inventory.
Well the comment was more in terms of reducing the number of days out there.
Okay and then my last one is a little bit more specificity on the cost savings.
Outlined on last call 450 million of total savings I guess, the ongoing number excluding having to be about 370 million that was you know overhead costs that you are taking out through layoffs hiring freezes salary reductions.
Now where are we now are those costs coming back on line I assume that that Threeseventy number.
The lower what what's the number of cost savings to expect going forward.
Yes, well you saw let's sit for a and we'll look at Opex for the first half the year, we when you compare year over year, it's an $80 million savings that we have when we talked about the Fourfifty was 450 versus our original plan for fiscal year 21.
Not a year over year reduction.
I'm expecting Q3 to Opex to also be down as we continue seeing the benefit of the cost reductions.
But obviously as the business is a much better than what we were anticipating and the outlook for next year as well is favorable we we need to continue invest in growth and so Q4, I'm expecting opex to be flat year over year.
Okay. Thank you specialty.
Thank you there are no further questions at this time.
During the meeting over to you.
Great. Thanks, everyone for joining us this morning, and we look forward speaking with you again.
In November 26, or third quarter results. Thank you bye.
Thank you the conference has now.
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